the g spot
Brait: worth the bother?
Activist shareholder Mergence has teamed up with Christo Wiese to squeeze some value from this stock-market lemon. We asked Mergence head of investments, Brad Preston, why they think there’s money to be made
The chess game playing out at Brait has begun in earnest. Activist shareholder Mergence has teamed up with Christo Wiese to squeeze some value from this stock-market lemon. We asked Mergence head of investments, Brad Preston, why they think there’s money to be made.
Inherently by virtue of what we do, we have to believe the market is inefficient at certain times.
One of the things we believe is that there is an opportunity, particularly in SA at the moment, that you may find businesses that are appropriately priced if the status quo continues.
But if we, as active shareholders, can try to change the future of the business, perhaps then value can be realised. We’ve looked at the mismatch of the NAV of [Brait’s] businesses and the share price to try to understand what that gap is.
How do we have comfort that there’s value? Well, we’ve done our independent assessment of the potential valuation of the underlying assets and looked at peer comparisons and looked at what these businesses [would fetch] if they were to be sold, and so on, and we’ve come to a view that there is significant value [R34 a share].
Why is it not trading there? Well, first, investment holding companies as a whole trade at a discount but the debt structure [in Brait especially] leads to a discount and there’s just a hell of a lot of businesses that are very cheap in SA.
We [want] to actively engage and have a positive influence on changing some of those reasons for a discount.
How does the call structure with Titan work? Who does it benefit?
Titan sold a portion of shares but then purchased a call spread, so it gives Titan participation on a portion of those shares from a price above R19.50 up to R27.50. What that [says] is that Titan, despite the sale of shares, clearly believes there’s significant value given that it has taken that upside exposure.
Do investment holding companies still merit our interest? You could argue that Brait should have stayed a private equity outfit.
You’ve got to look at the longer history of these companies and separate that from the current situation. So, if you look at something like PSG, there is a phenomenal track record as an investment holding company. With hindsight, I think private equity is probably a much more comfortable place to be than listed equity right now. But no-one could have known that. The other thing that’s specific right now is that our market is very intolerant of high debt levels in a listed environment and that is a big challenge. The market just has zero appetite for geared balance sheets.
Why is that? What’s changed?
If you look at the US, at where gearing levels are, it’s very different. It is much easier to tolerate high debt levels when everything is growing so you can keep pace with your debt payments.
Here, you’ve got an environment where it’s very difficult to find growth and investors have got a number of large geared failures top of mind.
And if you look at things — like where yields are trading globally — there is always that risk: have companies geared up on cheap debt, perhaps at a time when that turns? The other thing that is also a concern has been when companies have rand-currency mismatches in their debt.
You’ve been taking on an increasingly activist role. Why?
We have done a lot of introspection — I don’t think any fund manager in SA has missed every single disaster on the JSE — and I think managing people’s retirement savings is a huge responsibility. We would love to all sit at our computers and read research reports and just create alpha like that, but it is very hard to generate good returns for clients. So we will do everything that we need to do to generate those returns.
Whether corporate boards need to take a long hard look at themselves and be held to account, which is often uncomfortable, that’s a responsibility that we all have. Hell, we owe it to our investors.
Have fund managers abdicated this responsibility in the years when the going was good?
There are some institutional and structural reasons for some of these things. It is helluva time-consuming and hard to have these engagements and you can’t expect large fund managers to engage with every single company — it’s just not possible.
But as an industry insider, I think there is often very good engagement behind closed doors that is never seen in the media and sometimes they are painted with an unfair brush.